14
Convention and emphasizing the urgency to address climate change as indicated in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change
6
. It seems that there is still a winding road ahead. According to OECD
Environmental Outlook to 2030 2008, there are several obstacles preventing international policy and actions to mitigation climate change as follows: i Fears of
adverse impacts on industrial competitiveness. Resistance from affected sectors often challenges the political feasibility of introducing environmental boundaries such as
emission standards, targets and green taxes. Many countries face the same hesitation to move toward a low-carbon economy due to the infant technologies of cleaner fuel; ii
Uncertainty surrounding who should take action and who should bear the costs of action; and iii Under pricing of natural resource use and pollution. It is difficult,
practically, to accurately calculate the full costs of environmental, health, and productivity damage caused by economic activities. The concept of compensating
polluting activities into prices will be distorted by the fact that in most countries the use of scarce natural resources remains under-priced or even subsidized. From the three
obstacles mentioned, the central issue is the cost calculation and fair burden sharing for every country in adaptation and climate change mitigation. How large is the cost
estimation and how the burden sharing should be implemented remains a hotly debated topic.
4.2. Indonesian Perspectives
Indonesia is blessed with a forest area that accounts for 25 of all forests in East Asia and the Pacific. Indonesia also represents one of the mega-biodiverse countries in
the world.
7
Therefore, by taking appropriate actions, Indonesia has the potential to contribute significantly to the region in terms of reducing greenhouse gases GHG that
many blame for causing climate change. The consequences of ignoring this issue may induce a high economic cost in restoring imbalances in the environment caused by
irresponsible choices of procedures in investment projects.
4.2.1. Policy in Banking and Financial Sector
In the banking sector, Bank Indonesia BI aims its policy towards supporting the protection of the environment by encouraging banks to invest in businesses that serve
6
The Fourth Assessment Report AR4 of the United Nations Intergovernmental Panel on Climate Change IPCC placed specific importance on assessing the integration of adaptation and mitigation in
the field of climate change as well as on the cross cutting theme of sustainable development.
7
The World Bank’s; “Environment at A Glance”.
15
to protect the environment.
8
BI has the capacity to encourage banks to finance projects aimed at safeguarding the environment such as finding alternatives to fossil fuel energy,
recycling waste, reforestationafforestation, and the preservation of nature. BI has already stipulated in its banking regulations that projects with impacts on the
environment should be well designed and supported by environmental effects analyses. Bank Indonesia Regulation No. 72PBI2005 dated January 20
th
, 2005 and Circular Letter No. 73DPNP dated January 31
st
, 2005 on Asset Quality Rating of Commercial Banks, prescribe that when assessing business prospects, banks are required to evaluate
the measures taken by the debtors to conserve the environment. In this case, banks have to pay more attention to the results of the Analysis of Environmental Study or
AMDAL from the project. It can be seen here an opportunity to amend this regulation further in order to place more emphasis on complying with international standards.
Concisely speaking, BI will begin the transition from resource-based to environment- based development.
Moreover, under the framework of risk-based supervision, BI urges banks to be aware of their operational risks, especially related to lending activities to finance
projects that have direct or indirect effects on the environment. Banks are required to maintain manageable risk in order to achieve a sound assessment from the supervisors.
By ignoring environmental issues, a bank can run environmental risks that link to its operational risk, which in turn can raise overall risk. This should discourage banks
from financing projects without sound analysis on the environmental effects and without steps to prevent environmental degradation. In this case, opportunities also
exist for private insurance companies in their relationships with ensuring the best practices for banking. The insurance sector has the potential to become an economic
agent that sends signals on the price of environmental risks, especially for projects financed by bank lending.
Furthermore, within the financial stability framework, BI considers the surveillance of bank lending for projects that could potentially damage the
environment as important. By end of 2007 lending to the Mining and Manufacturing sectors accounted for 23 of total bank lending. This is less than lending to the
“Others” sector 29, which includes loans for consumption, and partly credit for automobiles and motorcycles. It is important to monitor outstanding bank lending that
8
On a lighter note, BI as a public entity has contributed directly in environmental protection activities by embarking on tree-planting programs. The most recent of the many events already organized was “A
thousand-tree planting” in April – May 2007 at Kupang as part of the “Our Village” programs. In this program, we aim to improve four development aspects: Economics, Education, Environment and Health.
We are looking forward to many programs similar to this in the future as part of our corporate social responsibility program.
16
could be environmentally destructive, which will enable the authority to oversee the environmental risk contributed by the banking sector. This way BI can observe the
banking sector’s overall operational risk related to the environment and help the domestic banking sector comply with international standards governing environmental
protection.
From another perspective, one may consider also how financial markes can foster adaptation to climate change. Some arguments state that the financial markets’
capacity to realllocatae costs and risks will help reduce the social costs of adaptation. Two types of financial instruments which are commonly used to respond climate
change are ‘weather derivatives’ and Catastrophe bonds. In Asia, not many countries have developed these instruments. Indonesia itself has not been using hedging
instruments against weather and catastrophic risks. For a further policy option, traditionally, Indonesia has been adopting a self-hedging policy by strengthening
financial system and building financing structure mechanisms to protect domestic economy from the price risks.
4.2.2. M onetary Policy
